Student debts are really a nightmare when it comes to loan repayments. But, what is the impact of canceling student debt?
If you are a parent, or student who is looking for student loan debt relief, it is important to know what is the status of canceling student debt?
President Joe Biden’s plan to forgive student debt for eligible borrowers is anticipated to bring welcome relief and could be life-changing for numerous adults and families across the United States. This move would especially benefit households of color.
However, individuals who never attended college or have already repaid their loans would see minimal impact, and the economic implications might not be as positive as some anticipate.
What Are the Impact of Canceling Student Debt?
When it comes to the impact of canceling a student debt, we need to understand how it is impacting student loan debts today. So, here are the key takeaways that you must know, that tells you the status of student debt cancellations:
Understanding the impact of canceling student debt:
- Back in 2022, the Biden-Harris administration rolled out a three-part plan to ease student debt, aiming to pardon up to $10,000 in federal student loans for individuals earning less than $125,000 yearly (or $250,000 for married couples).
- Those who had received Pell Grants could have been eligible for forgiveness of up to $20,000.
- Throughout the pandemic, federal student loan payments were put on hold but resumed in the fall of 2023.
- Following the U.S. Supreme Court’s rejection of his initial debt forgiveness plan, President Biden introduced the Saving on a Valuable Education (SAVE) Plan, offering an alternative method to address student loan debt.
- The SAVE Plan was officially accessible to student loan borrowers in August 2023.
What is Biden’s Plan to Cancel Student Debt?
On August 24, 2022, the Biden-Harris administration unveiled its comprehensive plan for long-term relief from student debt. However, in June 2023, the U.S. Supreme Court overturned this plan. The strategy included three main components:
- Individuals earning less than $125,000 annually would have been eligible for up to $10,000 in federal student loan forgiveness. Even couples filing jointly or heads of households earning up to $250,000 would still qualify. Those who received income-based Pell Grants during their studies could have been forgiven up to $20,000.
- The temporary halt on federal student loan payments would have ended on September 1, 2023.
- Income-driven repayment (IDR) plans would have been limited to 5% of discretionary income instead of the current 10%.
Although the application process for student loan forbearance briefly opened, legal challenges led the U.S. Department of Education to indefinitely suspend accepting applications and pause the processing of submitted ones.
Despite the Supreme Court’s rejection of the debt forgiveness plan, the administration continued to explore alternative avenues for debt relief through loan forgiveness and income-driven repayment plans. The pause on student loan interest ultimately ceased on September 1, 2023, with payments resuming on October 1, 2023.
It’s worth noting that while the American Rescue Plan ensures that student loan forgiveness granted from January 1, 2021, to December 31, 2025, is tax-free at the federal level, some states may have different regulations. Currently, forgiveness may be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
Remember, student loan forgiveness would only apply to specific federal loans held by the Department of Education. Private loans are not eligible for forgiveness.
What Are the Positive Impacts of Canceling Student Debt?
Even though many borrowers are facing debts surpassing $10,000, any form of student loan forgiveness would bring them significant financial relief. Some economists argue that forgiving loans could also give a boost to the economy, as borrowers could redirect that money towards various expenses, like purchasing a home.
For instance, if you’re dealing with $35,000 in student loan debt and making monthly payments of $300 at a 4.66% interest rate, over a span of 13 years, you’ll end up paying nearly $12,000 in interest alone. By wiping out $10,000 of that debt, you could potentially save around $6,000 and clear off the remainder of your debt five years earlier.
The act of forgiving student debt could be especially advantageous for borrowers with lower incomes, particularly women and individuals from minority groups.
A 2020 academic paper asserted that if $75,000 of student debt were forgiven, the “median wealth for Black households overall, not just borrowers, would instantly increase by 42%, and around 34% with $50,000 in forgiveness.”
While these figures exceed what President Biden has proposed, they align with his administration’s commitment to promoting racial equity.
What Are the Negative Impacts of Canceling Student Debt?
Critics argue against forgiving any amount of student loan debt, partly because it would disproportionately benefit a relatively privileged group: college students. While over 45 million Americans hold some student loan debt, they make up only about 13.5% of the U.S. population.
Aside from concerns about fairness, there are also significant costs associated with the plan. Fiscal experts estimate that forgiving loans would tally up to $519 billion over a 10-year period.
Adding another $16 billion for forbearance in 2022 and potentially another $450 billion for the new income-driven repayment (IDR) program, the total bill could reach close to $1 trillion.
This potential trillion-dollar forgiveness has to be funded somehow. Current projections suggest that forgiveness would cost around $2,500 per taxpayer, regardless of whether they attended college or not.
While forgiving student loans might provide relief to current borrowers, an analysis by the Committee for a Responsible Federal Budget predicts that student loan debt would climb back up to $1.6 trillion by 2028.
Since the plan doesn’t address the root issue of rising education costs, it doesn’t alleviate the burden for current and future students facing historically high expenses.
Another potential downside of student loan debt forgiveness is the risk of higher inflation rates. The Committee for a Responsible Federal Budget anticipates that injecting $10,000 to $20,000 into millions of borrowers could further drive up inflation rates, potentially increasing personal consumption expenditure (PCE) inflation by 15 to 27 basis points.
Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?
Absolutely. The student debt relief plan specifically pertains to federal loans managed by the U.S. Department of Education.
These loans encompass undergraduate and graduate direct loans, Federal Family Education Loans (FFELs), Perkins Loans held by the Department of Education, and certain defaulted loans under the Department of Education’s purview.
What Are the 3 Pros of Canceling Student Loan Debt?
The 3 of the major arguments in favor of broad student debt cancellation are:
- Student loan debt acts as a barrier to new business ventures and restricts consumer spending. By forgiving student debt on a large scale, it could potentially stimulate the national economy by making it more feasible for borrowers to actively participate in it.
- Black borrowers are disproportionately burdened by student loan debt compared to their White counterparts, due to factors such as family income and generational wealth. Canceling student debt could play a significant role in reducing the racial wealth gap.
- Heavy debt loads have prevented an entire generation from reaching important life milestones, such as marriage, homeownership, and retirement savings. Reducing the burden of student debt would likely enhance financial and personal well-being, credit scores, job stability and satisfaction, and even family stability for numerous individuals. It would enable more people to own homes earlier in life, have the ability to establish emergency funds, invest in human capital, and accumulate wealth.
Is Enrollment in the Saving on a Valuable Education (SAVE) Plan Automatic?
It depends.
Borrowers who are currently enrolled in the Revised Pay as You Earn (REPAYE) plan will be automatically transferred to the new Saving on a Valuable Education (SAVE) Plan. However, other borrowers will need to submit an application to be eligible for forgiveness.
Final Thoughts
While there’s a widespread agreement that reforming higher education, especially concerning costs, is necessary, experts have differing opinions on whether forgiving some or all student loan debt is the most effective approach.
While individuals receiving forgiveness will experience a financial advantage, there might be broader consequences that could end up being more expensive for taxpayers in the long term.
Hey, I am Sachin Ramdurg. I run and manage futuredecider.com website that helps students, graduates, and professionals, to find and decide on their future career with ultimate future career advices and future career guides. I have an overall 12+ years of career guidance experience in multiple domains which has helped multiple students, graduates, and professionals to find the best career path for their future.